FY22 results met our expectations. FY22 earnings were driven by house brands which accounted for 93% of turnover. We like NOVA for its business model which encompasses the entire spectrum of value chain from product conceptualization starting from R&D to manufacturing, with growth driven by capacity expansion, a widening distribution network and penetration into local public hospitals. Maintain our forecast, TP of FM1.09 and OUTPERFORM call.

YoY, FY22 revenue rose 21% due to contribution from house brands (+29%) accounting for 93% of turnover which more than offset lower OEM sales. EBITDA fell 4ppt to 45% from 49% which we believe was due to one-off expenses incurred in 4QFY22. The increase in expenses were due to higher staff cost incurred resulting from annual bonus payment and upward salary revision for administrative staff, expenses for share options and additional amortisation of research and development costs as a result of commercialisation of new products. Excluding the one-off costs, core net profit rose 21%. A final interim of DPS of 1.25 sen was declared bringing total FY22 DPS to 3.25 sen which came in above our expectation.

Outlook. According to market research by Grand View Research., in the long term, the global dietary supplements market is projected to grow at a compound annual growth rate of 8.6% from 2021 to 2028. Amplifying the growth potential is the surge in worldwide demand for health supplement products, as consumers take a more proactive stance towards their health and well-being, especially following the COVID-19 pandemic. Zooming to Malaysia, the growth of the domestic health supplement market shall be driven by increasing awareness for proper nutrition intake and growing ageing population. The Malaysia nutraceuticals market is projected to reach USD1,382.3m by 2027 from USD794.4m in 2020. In tandem with industry sector growth, we forecast 19%/18% net profit growth for FY23/FY24.

Forecasts. We maintain FY23F/FY24F earnings and our OP rating. TP of RM1.09 is based on 15x CY23F EPS, in line with closest comparable peers. There is no adjustment to TP based on ESG for which it is given a 3-star ESG rating as appraised by us.

We like NOVA for its: (i) integrated business model which encompasses the entire spectrum of pharmaceutical value chain from product conceptualization starting from R&D to manufacturing and sales, (ii) superior margins due to its original business manufacturing (OBM) business model; and (iii) earnings growth driven by capacity expansion, a widening distribution network and penetration into local public hospitals.

Risks to our call include: (i) intense competition from existing/new and local/foreign players, (ii) weak ringgit resulting in high cost of imported inputs; and (iii) product safety and regulatory risks.

Source: Kenanga Research - 26 Aug 2022